Originally posted on http://www.coronavirusguide.netbenefits.fidelity.com/money
Make sure you understand the consequences.
To hear financial planners talk, you’d think that borrowing money from your employer-sponsored retirement account is pure madness. Don’t do it! It’s a bad idea! But in one recent survey*, about 41% of respondents had taken a loan from their retirement savings. And while 7% said they regretted taking the loan, a full 53% did not. Does that mean it’s sometimes okay to do this?
Here are a few questions you should ask yourself before dipping into your 401(k) piggy bank:
Do I really understand how it works? Many people hear that they can borrow money from themselves in an advantaged interest rate scenario where they’re paying interest to themselves. Great, right? “What they often don’t get is that it removes the money from working for you from an investment perspective, because it removes the money from the allocation where it should be,” says Andrea Blackwelder, a financial planner in Denver. “At the end of the day, you have to understand that you’re borrowing from your future retirement self.” The longer it takes you to repay the loan, the longer that money is out of commission.
Is my job super secure? In many situations, if you take out a 401(k) loan and then lose your job, you’ll be required to pay back the loan in full within a specified time frame, often 60 days. If you don’t have the ability to do that, the loan will be considered an early distribution, and you’ll owe taxes and penalties on it. “That’s where most financial planners say there’s a bit more risk than other types of financing,” Blackwelder says. “If you were to lose your employment, the loan pretty much comes due.”
Am I using the money to buy an appreciable asset? In other words, are you putting your investment money into another investment? “The loan is more justifiable for appreciable assets, such as a home purchase,” says Mark Amberg, a financial planner in Alexandria, VA. “It is a bad transaction to pay for depreciable assets with assets from the 401(k). That shiny red sports car will seldom appreciate. The loan will be lost if used to purchase assets that decrease in value.”
Am I hoping to use the money to pay college tuition? This is just a bad idea. There are a variety of other ways to borrow for school that won’t directly impact your retirement funds. “When I think of 401(k) loans, I think of very specific, short-term situations where you need a little bit of a patch,” Blackwelder says. “Most of your college loans are going to be on the books for decades.”
Am I trying to bail out my children? “A lot of times people call in because they feel that their children are in desperate situations and absolutely need money,” says Joe Krier, a financial planner in Jacksonville, FL. “A parent might be best off just turning the kid down and letting them learn something.”
Is it a short-term need? “Generally, [your 401(k) is] the last place to go,” says Daniel Galli, a financial planner in Norwell, MA. “Exceptions are for a short-term ‘bridge’ loan when the money can be repaid in a short time, such as closing on the new house before selling the old one, or paying tuition or another bill before a CD or other termed money becomes available. Paying off credit cards, loan consolidation and other uses are usually not a good idea.”
Do I have other options? “With all the low money down mortgage options now, if you don’t have enough for the down payment, then you shouldn’t be buying a house,” says Jim McGowan, a financial planner in Doylestown, PA. “The only way I would use it for a down payment is if you use the money to get better terms on a mortgage loan then, after closing, get a home equity line of credit and use those funds to pay off the 401(k) loan.”
If you are seriously considering taking a loan from your 401(k), please contact our office. There have been some rule changes due to the CARES Act that would be worth discussing. Reach out to us via phone or email, at (248) 879-4510, info@glebaandassociates.com.
*SURVEY SAYS: Taking Retirement Savings Prematurely, PLANSPONSOR, May 31, 2016.
Article copyright 05/18/2016 by Forbes.
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Gary is a Financial Associate at Gleba & Associates, Inc., joining our team in June 2020. After graduating from Walsh College with a Bachelor’s Degree in Finance in 2013, he began his career at Raymond James Financial Services. He then moved to the world of banking, working as a banker with Chase Private Client and then as an Assistant Vice President, Financial Advisor with PNC Investments. Gary has expertise in all aspects of financial planning including investment management, higher education planning, life insurance, and long-term care insurance needs analysis. When he gets away from the office, he loves to spend time with his wife, Lauren, and two daughters, Hadley and Harper. He enjoys woodworking, boating, summer weekends at the family cottage, spending time outdoors and traveling.
Conor is a Financial Associate at Gleba & Associates, Inc., where he started in 2018. Conor has prior experience in the financial planning industry, as well as in the insurance industry. His high level of understanding insurance and financial products helps him in assessing the needs of our clients. He holds a Bachelor of Science degree in Business Administration with a concentration in Finance from the University of Detroit Mercy. You can often find Conor playing soccer or walking with his two dogs Milo, and Ellie. He is also an avid follower of the Detroit Tigers, Detroit Red Wings and his alma mater, the University of Detroit Mercy Titans.
Lorie Heitzer is our Financial Associate at Gleba & Associates, Inc., where she has been a valuable employee for more than a decade! In her current role, Lorie assists with client reviews, implements client financial planning, and handles preparation of investment paperwork. During her time with Gleba & Associates, Lorie has earned her Series 6 (Investment Company Variable Contracts Representative), 63 (Uniform Securities Agent) and Life Insurance Licenses, allowing her to move into her current role where she assists clients in both of these areas. Lorie and her husband Bill, along with their daughters Lauren and Alexandria, and sons-in-law, Andrew & Joe, enjoy golf and make it a family event whenever possible. Her tenure at Gleba & Associates speaks volumes to her passion for the firm’s family atmosphere and her dedication to our clients and their financial and insurance needs.
Terri is the Service Manager at Gleba & Associates, Inc., Joining the team in April, 2015. In her role, she handles client service requests and underwriting. Terri’s previous experience in 401(k) Retirement Plans, Payroll and Human Resource Administration is invaluable, allowing Gleba & Associates to grow and run efficiently. This is knowledge that can also assist our small business clients as they grow their businesses. Terri enjoys spending time with family, which includes her husband, Gerry and her two children, Vincent and Genna. She loves the outdoors and camping with family in their RV. Terri looks forward to continuing the high level of customer service you have come to expect from Gleba & Associates!
Michael is the Marketing Manager at Gleba & Associates, Inc., where he began in August 2017. In his position, Michael creates and develops marketing strategies to enhance the image of Gleba & Associates, and helps maximize the Client-Advisor relationship. He is also in charge of company events, seminars, and educational workshops. Michael has a Bachelor of Applied Arts Degree in Integrative Public Relations from Central Michigan University. When he is not in the office, Michael can most likely be found playing billiards, playing poker, on the tennis court, or rooting on the Utica Unicorns baseball team. Michael stays active by going to the gym and going to the dog park with his Labrador-mix, Milton. His approachable attitude, along with experience in marketing, communications, and social media, makes him a valuable asset to the Gleba & Associates team.
Moiz is our Financial Associate at Gleba & Associates, Inc., where he began in 2013 after working for Bank of America and Thomson Reuters in various financial roles. In his position, Moiz assists in the research of financial solutions in order to meet client’s needs, conducts client reviews, provides insurance quotes, offers detailed financial plans, and delivers follow-up services to our clients. Before moving to the United States in 2004, Moiz grew up in rural India, where he was raised in a family of entrepreneurs. This allowed him to quickly learn the value of financial investment. Moiz holds a Bachelor of Commerce Degree in Accounting from Gujrat University and a B.B.A. in Management and an MBA from Walsh College of Accountancy and Business Administration, where he was elected as a member of Delta Mu Delta, the International Honor Society in Business Administration in recognition of high scholastic attainment. Moiz enjoys spending time with his wife, Tasneem, son, Taha, and family. He also loves playing tennis and rebuilding computers. His expertise in the areas of banking, mortgage and taxation helps to provide our clients with distinct portfolio advice as well as overall financial direction and growth.